M/S Seema Silk & Sarees & Anr vs Directorate Of Enforcement & Ors

REPORTABLE

IN THE SUPREME COURT OF INDIA

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO. 860 OF 2008 [Arising out of SLP (Crl.) No. 6812 of 2007]

M/s. Seema Silk & Sarees & Anr. ...Appellants

Versus

Directorate of Enforcement & Ors. ...Respondents

JUDGMENT

S.B. SINHA, J :

1. Leave granted.

2. Constitutionality of Sub-sections (2) and (3) of Section 18 of the

Foreign Exchange Regulation Act, 1973 (for short "the Act") is in

question in this appeal which arises out of a judgment and order dated

30.07.2007 passed by the High Court of Judicature at Bombay in

Criminal Writ Petition No. 336 of 2007.

2 3. Appellant No. 1 herein is a partnership firm and Appellant No. 2 is

its partner. Appellant No. 1 used to export garments and textiles to

various countries. It allegedly could not repatriate the value of goods

from the export proceeds. According to the appellants, whereas export to

developed economies like US, UK, Europe and Japan, on credit basis,

does not undergo severe competition and very minimal profit margin can

be maintained, export to the less developed countries or the countries

with poor legal system earn greater profit margin.

4. Appellants' business allegedly came to a standstill because of its

inability to repatriate export proceeds to the tune of 16.5 crores from a

few overseas buyers. A notice was issued by the Enforcement

Directorate under Sections 18(2) and 18(3) of the Act alleging that in

view of their failure to repatriate the entire sale proceeds of the exports

which the appellants have made during 1997-98, the said provision is

attracted.

They, in the cause shown, allegedly furnished details of

repatriation they could bring about as also the steps taken by them in that

behalf. They applied for extension of time through the authorized dealer,

viz., the Canara Bank. However, with the passage of time, the Branch 3

Manager of the Bank did not grant any extension of time for repatriation

of the export proceeds. A suit was also filed by the Canara Bank before

the Debt Recovery Tribunal, Mumbai.

5. The Enforcement Director, in the aforementioned proceedings,

imposed a penalty of Rupees One Crore on the firm and Rs.25 lakhs each

on the partners. An appeal preferred by the appellants before the

Appellate Tribunal was allowed holding that the appellants have taken

all reasonable steps for repatriation. A further appeal was taken by the

Enforcement Directorate before the High Court which was marked as FA

Nos. 8 and 9 of 2005. However, the High Court although entertained the

appeal, did not pass any order of stay.

6. A criminal case was also initiated. Cognizance thereon was taken

and the appellants were summoned by an order dated 19.06.2004 by the

Chief Metropolitan Magistrate, Esplanade Court, Mumbai. Appellants

thereafter filed a criminal application bearing No. 6901 of 2005 for

quashing of the criminal proceedings pending against them. The said

application was disposed of by an order dated 26.07.2006 observing that

as the appellants had already filed application for discharge, the learned

Magistrate may pass appropriate order thereupon. 4

By an order dated 10.10.2006, the said application for discharge

was dismissed. It was inter alia contended by the appellants in the said

discharge application that the order of Tribunal being civil in nature, the

same was binding on the criminal court and, thus, the prosecution against

them under Section 56 of the Act for was not maintainable. The order

taking cognizance having been passed on 27.05.2002, the same was

contended to be bad in law.

7. Appellants preferred writ petition thereagainst questioning the

constitutionality of Sections 18(2) and 18(3) of the Act as also

constitutional validity of the Constitution 39th Amendment Act. By

reason of the impugned judgment, the said writ petition has been

dismissed.

8. Mr. Mathews J. Nedumpara, learned counsel appearing on behalf

of the appellants, would submit that Sections 18(2) and 18(3) of the Act

placing the burden of proof upon the accused must be held to be a law

having draconian character and, thus, is unconstitutional. 5

It was submitted that by reason of the said provision,

discrimination has been made between a domestic trader and an exporter

and, thus, the same is violative of Article 14 of the Constitution of India.

It was urged that validity of the said provision must be judged on

the touchstone of commercial considerations inasmuch as whether an

exporter may not be able to repatriate the export proceeds particularly

when such exports are made to the developing countries. The learned

counsel would contend that all traders in terms of the provisions of the

Income Tax Act, 1961 make a provision for bad debt. When a trader

suffers loss, it is permissible to make a provision for writing off such bad

debts. It was furthermore urged that in terms of the provisions of the

Income Tax Act, the accounts are required to be audited by a Chartered

Accountant and, thus, the impugned law being contrary to the accounting

practice should not be sustained. Such repatriation of exports proceeds,

thus, being uncertain, it was urged, the impugned provisions as also the

Constitution 39th Amendment Act cannot be sustained.

9. Mr. G. E. Vahanvati, learned Solicitor General appearing on behalf

of the respondents, on the other hand, would submit that a domestic

trader and an exporter belong to different classes and such classification, 6

being valid, the impugned provisions are not ultra vires Article 14 of the

Constitution of India.

It was pointed out that having regard to the nature of business and

the risk involved in the export of commodities, the appellant could

approach the Reserve Bank of India for grant of exemption and in that

view of the matter it does not cause even any hardship to any individual.

10. Sections 18(2) and 18(3) of the Act reads as under:

"18. Payment for exported goods:

(1) ***

(2) Where any export of goods, to which a notification under clause (a) of sub-section (1) applies, has been made, no person shall, except with the permission of the Reserve Bank, do or refrain from doing anything, or take or refrain from taking any action, which has the effect of securing -

(A) in a case falling under sub-clause (i) or sub-

clause (ii) of clause (a) of sub-section (1),-

(a) that payment for the goods -

i. is made otherwise than in the prescribed manner, or 7

ii. is delayed beyond the period prescribed under clause (a) of sub-section (1), or

(b) that the proceeds of sale of the goods

exported do not represent the full export value of the goods subject to such deductions, if any, as may be allowed by the Reserve Bank; and

(B) in a case falling under sub-clause (ii) of clause (a) of sub-section (1), also that the sale of the goods is delayed to an extent which is unreasonable having regard to the ordinary course of trade: Provided that no proceedings in respect of any contravention of the provisions of this sub-section shall be instituted unless the prescribed period has expired and payment for the goods representing the full export value has not been made in the prescribed manner within the prescribed period.

(3) Where in relation to any goods to which a notification under clause (a) of sub-section (1) applies the prescribed period has expired and payment therefor has not been made as aforesaid, it shall be presumed, unless the contrary is proved by the person who has sold or is entitled to sell the goods or to procure the sale thereof, that such person has not taken all reasonable steps to receive or recover the payment for the goods as aforesaid and he shall accordingly be presumed to have contravened the provisions of sub-section (2)."

11. Admittedly, the Act finds place in the Ninth Schedule of the

Constitution of India. In terms of Article 31B of the Constitution of 8

India inter alia none of the Acts specified in the Ninth Schedule is ultra

vires even if it is inconsistent with or takes away or abridges any of the

rights conferred by any provisions of Part III of the Constitution of India.

12. Appellants have questioned the validity of the Act only on the

ground of infringement of Article 14 of the Constitution of India. Apart

from the fact that the Act is protected under Article 31B of the

Constitution of India having been placed in the Ninth Schedule thereof,

even otherwise, we do not find any reason to arrive at a conclusion that

the Act is ultra vires Article 14 of the Constitution of India. A

discrimination on the ground of valid classification which answers the

test of intelligible differentia does not attract the wrath of Article 14 of

the Constitution of India. Hardship, by itself, may not be a ground for

holding the said provision to be unconstitutional.

In Ajoy Kumar Banerjee v. Union of India [(1984) 3 SCC 127],

this Court held:

"50. Differentiation is not always discriminatory. If there is a rational nexus on the basis of which differentiation has been made with the object sought to be achieved by particular provision, then such differentiation is not discriminatory and does not violate the 9

principles of Article 14 of the Constitution. This principle is too well-settled now to be reiterated by reference to cases. There is intelligible basis for differentiation. Whether the same result or better result could have been achieved and better basis of differentiation evolved is within the domain of legislature and must be left to the wisdom of the legislature. Had it been held that the scheme of 1980 was within the authority given by the Act, we would have rejected the challenge to the Act and the scheme under Article 14 of the Constitution."

13. No case has been made out that the Act is confiscatory in nature.

No foundation fact has also been brought on record.

Appellants have not annexed even a copy of the writ petition. The

learned counsel has not been able to satisfy us that there existed any

factual foundation in support of his argument.

In Southern Petrochemical Industries Co. Ltd. v. Electricity

Inspector & ETIO [(2007) 5 SCC 447], this Court held:

"69. The issue that the 2003 Act is in violation of the equality clause contained in Article 14 of the Constitution of India was not raised before the High Court. Only in one of the civil appeals, prayer was made for urging additional ground and the same having been directed, additional ground has been taken to urge the said question. A ground taken, however, must 10

be based on a factual foundation. For attracting Article 14, necessary facts were required to be pleaded. The foundational facts as to how Section 14 of the 2003 Act would be discriminatory in nature have not been stated at all. The Government of Tamil Nadu has also not been given any opportunity to meet the said contention.

70. It is now trite that such factual foundation, unless is apparent from the statute, itself, cannot be permitted to be raised and that too for the first time before this Court."

It was further opined:

"74. In absence of necessary pleadings and grounds taken before the High Court, we are not in a position to agree with the learned counsel appearing on behalf of the appellants that only because Section 13 of the repealed Act is inconsistent with Section 14 of the 2003 Act, the same would be arbitrary by reason of being discriminatory in nature and ultra vires Article 14 of the Constitution of India on the premise that charging section provides for levy of tax on sale and consumption of electrical energy, while the exemption provision purports to give power to exempt tax on "electricity sold for consumption" and makes no corresponding provision for exemption of tax on electrical energy self-generated and consumed."

14. In absence of such factual foundation having been pleaded, we are

of the opinion that no case has been made out for declaring the said

provision ultra vires the Constitution of India. 11

15. A domestic trader and an exporter stand on different footings. The

said provisions were made when the country was undergoing severe

`foreign exchange crunch'. The Parliament in its wisdom has inserted

the said provisions so as to prevent fraud. Sub-section (1) of Section 18

of the Act provides for filing of an application for grant of exemption by

the Reserve Bank of India. Refusal to give such an exemption is

required to be preceded by reasonable opportunity of making a

representation.

16. A legal provision does not become unconstitutional only because it

provides for a reverse burden. The question as regards burden of proof is

procedural in nature. [See Hiten P. Dalal v. Bratindranath Banerjee,

(2001) 6 SCC 16 and M.S. Narayana Menon v. State of Kerala, (2006) 6

SCC 39]

17. The presumption raised against the trader is a rebuttable one.

Reverse burden as also statutory presumptions can be raised in several

statutes as, for example, the Negotiable Instruments Act, Prevention of

Corruption Act, TADA, etc. Presumption is raised only when certain

foundational facts are established by the prosecution. The accused in 12

such an event would be entitled to show that he has not violated the

provisions of the Act. In a case of this nature, particularly, when an

appeal against the order of the Tribunal is pending, we do not think that

the appellants are entitled to take the benefit thereof at this stage. Such

contentions must be raised before the criminal court.

18. Commercial expediency or auditing of books of accounts cannot

be a ground for questioning the constitutional validity of a Parliamentary

Act. If the Parliamentary Act is valid and constitutional, the same cannot

be declared ultra vires only because the appellant faces some difficulty in

writing off the bad debts in his books of accounts. He may do so. But

that does not mean the statute is unconstitutional or the criminal

prosecution becomes vitiated in law.

19. An order of discharge can be interfered with by the High Court on

limited grounds. At that stage, it need not be shown that the appellants

may not ultimately be convicted. It is enough if there exists a strong

suspicion.

20. The factual matrix involved in the matter is one of the accounting.

The burden being on the appellants to show that they had taken all 13

permissible steps as are provided for under the law, the question of

passing any order of discharge at this stage would not arise.

21. The export was to the tune of US $ 55,03,218.78. Appellants on

their own showing exported goods to the countries like USA, Canada,

France, Indonesia, etc. They did not obtain any general or special

permission from the Reserve Bank of India for non-realisation of export

proceeds beyond six months which is the period specified under Sub-

section (1) of Section 18 of the Act.

22. As all contentions as to whether the appellants have committed

any offence or not shall remain open, we are of the opinion that no case

has been made out for interference of the impugned judgment. The

appeal is dismissed. No order as to costs.

...............................J. [S.B. Sinha]

................................J. [Lokeshwar Singh Panta]

New Delhi;

May 12, 2008